What you’ll learn to do: Outline the considerations taken by retailers when buying merchandise
In an earlier section, we discussed in general terms how buyers help create their seasonal plans and make their purchase commitments. In this section, we will go into a bit more detail about the thought process that buyers use to make purchase decisions: vendor and brand selection, sourcing, negotiation and building strong partnerships.
- List some of the brand selection possibilities and their benefits
- Describe some of the issues involved with sourcing decisions
- Identify how a retailer can prepare for negotiations
- Explain the value in building strong partner relationships
- Summarize the ethical and social responsibilities that come with buying decisions
Brand selection is an important part of any retail merchandise mix. The importance of a brand to a retailer depends of course on the category of retailer and its market niche, among other things. According to the National Retail Federation, the largest categories of the US retail market are:
- Food (Kroger, Safeway, Publix)
- Electronics (Amazon, Best Buy, Apple)
- Home Improvement (Home Depot, Lowe’s, Amazon)
- Variety/Drug (Walgreen, Rite Aid, CVS)
- Apparel (Macy’s, JC Penney, Kohl’s, Nordstrom)
For these retail categories, some of the most popular brands come to mind:
- Food (PepsiCo, Coca-Cola, Nestle, Kraft, Betty Crocker, Kellogg’s)
- Electronics (Apple, HP, Samsung, Microsoft)
- Home Improvement (Craftsman, Kohler, Stanley, Rubbermaid)
- Variety/Drug (Johnson & Johnson, Gillette, Cover Girl)
- Apparel (Nike, Levi’s, Victoria’s Secret, Burberry)
How does a retailer decide which brands are the right ones for their particular business? Brands can be used by retailers to enhance their business in several ways. First, some brands can grant exclusive distribution rights in certain markets to give a retailer enhanced prestige and a lack of competition for that particular product line (you won’t find Prada shoes in Wal-Mart).
Secondly, brands in an assortment create credibility for a retailer. For the majority of retailers, brands share space in the assortment with the “store label” or “private label”. Brands will usually be priced higher than the private label, creating a sense of value for the store brand. The GAP founded their business on carrying Levi’s jeans along with GAP brand jeans at much lower price-points. You will find Advil carried at CVS, along with lower-priced “CVS Ibuprofen”.
Third, brands offer a variety of other benefits to retailers. Product design, manufacture and transportation are all usually taken care of by the branded supplier, giving the retailer less to worry about. Branded vendors often will run advertising and promotions in-season that offer participation options for the retailers carrying the brand. Also, branded vendors will sometimes offer end-of-season special buys to retailers, off-loading extra inventory at reduced costs to beef up a retailer’s bottom line. Finally, retailers can work with their branded suppliers to request markdown allowances and even return merchandise that is not selling as promised.
Sourcing is simply the process of finding goods or services, but it is not a simple matter. Retailers share the same issues and considerations as most other businesses with the procurement function. What are some of the key issues involved when making sourcing decisions?
Company. First, retailers review the potential companies with which to source their goods or services. Does the company have a strong track record of manufacturing the products in question or performing the services being considered? Who are other customers of the company who have purchased similar products or received similar services being sought? Does the company being considered have the manufacturing capacity to handle your orders (if you are a large retailer like Target, Safeway, etc.)? Is the quality level of the company’s products consistent with the quality expectations of your company? Does your company have an existing relationship with the company being considered and has met expectations in prior dealings. If you are that activewear buyer at Dick’s looking for a source for men’s private label outerwear, you would probably prefer to work with the company making outerwear for The North Face and L.L. Bean that you have worked with for many prior seasons.
Cost. One of the first criteria that comes to mind when making a sourcing decision is cost. A retailer will shop for the best possible price in relation to quality and availability. Common sense would dictate that lower costs lead to higher margins for the retailer.
Logistics. This term could be used to cover a variety of considerations regarding which company to select for your sourcing decision. In order to procure goods at the lowest price, retailers will sometimes source in less-developed countries. Does the company in question have the means of production physically in place to meet your anticipated needs? Are the components or raw materials of the product readily available to the potential sourcing company. Is the infrastructure in place for this company to be able to execute on the orders you would place? Is the company manufacturing in a country that has the appropriate infrastructure and logistics to be able to transport goods to the transportation hub for export?
Government Regulations. Other considerations would include if there are government regulations in place that would affect the sourcing decision: tariffs, quotas, etc.
Sourcing is both an art and a science. Larger organizations have staff who focus exclusively on providing sourcing services for their company. Software applications have been developed to support the sourcing process, as well as, managing purchase contracts throughout the manufacturing lifecycle (SCM, ERP, etc.). But as much as business is transacted between companies, it is conducted between the people representing those companies. Strong business relationships between the people involved can make the difference when inevitable problems occur. We will discuss this concept further in a later section.
Let’s begin this discussion with a definition of the term negotiation:
A negotiation is a formal discussion between two or more parties to reach an agreement.
As with many of the other topics we have discussed in this section, the principles of negotiation are the same for the retailer as they are for any business in general. Two obvious applications for negotiation are conflict management and procurement. These two examples illustrate the breadth of situations where negotiation skills need to be applied. Addressing personal conflict often involves emotional and cultural issues whereas procurement negotiation is usually about contractual terms and conditions.
Whatever the context, there are common factors that exemplify a good negotiator:
- the ability to describe common goals and boundaries;
- emotional control and equal treatment of all parties;
- good listening and communication skills;
- thorough knowledge of bargaining tactics;
- an ability to close a negotiation in a way that secures the outcome.
Regardless of whether the negotiation is competitive or collaborative, it usually follows a typical procedure:
- Plan: All parties should prepare thoroughly. This includes gathering as much information as possible; setting goals for the outcome and agreeing an escalation route if the negotiation is unsuccessful. Each party should attempt to understand the cultural, commercial and ethical background of the others.
- Discuss: Set the scene, identify the key issues and communicate the objectives. Listen, question and feedback regularly to confirm understanding.
- Propose: Propose a solution that is clear and unambiguous.
- Bargain: Discuss the proposal; communicate personal boundaries and areas of flexibility.
- Agree: Reach agreement on the core issues; document what has been agreed and record any peripheral, outstanding items with timescales for resolving them.
- Implement: Communicate the outcome of the negotiation as necessary, update management.
Negotiation is easy to get wrong. The cardinal sin is to enter into negotiations unprepared. This can easily lead to mistakes such as making opening offers that are clearly unacceptable to the other parties.
Specifically for a retailer, negotiations can be internally or externally focused. Internal negotiations typically are between departments. The merchandise buying office may negotiate for additional space for their product presentation with the store organization. The store organization may negotiate with the merchandise planning department for a larger allocation of certain goods.
External negotiations for retailers usually center around the procurement function of merchandise buyers. Typical buyer/vendor discussions would include issues like price, delivery, allocation, promotions, and allowances. Buyers should be thoroughly prepared with hard data regarding recent sales performance of the vendor’s products in their operation, actual product delivery versus contracted, markdowns taken by the retailer to clear goods, and any quality issues or returns.
Here is an excellent video from Margaret Neale from Stanford Graduate School of Business on some advanced negotiation skills.
Building Partner Relationships
Individuals and businesses alike need strong partner relationships to be successful. We have all learned of the benefits of individual connections and networking: information, advice, introductions, referrals and more. This is true in business in general and the retail industry in particular, especially between retailers and suppliers.
First, strong partner relationships between retailers and suppliers are the foundation of an effective supply chain. This topic was covered in an earlier section on SCM, so suffice it to say that mutual planning, commitment and loyalty between the parties are responsible for strong business success for both sides.
Second, even if a retailer and vendor are not participating in a formal SCM arrangement, a strong partnership between the parties will create mutual benefits. For the retailer, having strong vendor partners will ensure they are procuring the right products, delivered on-time and at the best prices. Vendors are also a great source of market information as they are probably working with many retailers in many geographies and channels and hearing lessons learned that can be shared with their closest retail partners.
Strong partner relationships greatly benefit vendors and suppliers as well. As was just mentioned, retailers will share valuable success/failure stories with trusted vendor partners. This provides direction and insights that vendors can use as they are making their own purchase decisions (for raw materials and production time) even further in the future than retailers in many cases. In addition to information, retailers will be more inclined to give trusted vendor partners more complete purchase commitments and estimates for projected activity further in advance.
Ethical and Social Responsibilities
Ethical and Social responsibility is the idea that businesses should balance profit-making activities with activities that benefit society. It involves developing businesses with a positive relationship to the society in which they operate.
Social responsibility takes on different meanings within industries and companies. For example, Starbucks Corporation and Ben & Jerry’s Homemade Holdings Inc. have blended social responsibility into the core of their operations. Both companies purchase Fair Trade Certified ingredients to manufacture their products and actively support sustainable farming in the regions where they source ingredients. Conversely, big-box retailer Target Corporation, also well- known for its social responsibility programs, has donated money to communities in which the stores operate, including education grants.
The Fair Trade concept is a world-wide movement where goods are produced and sourced in a sustainable and environmentally-friendly way. For retailers who procure products from less-developed countries, sustainable sources of supply cannot be maintained without workers and farmers receiving a living wage.
“When people have the capacity to invest in better futures, the result is a healthier workforce and ultimately higher quality goods. Our model is fueled by committees of farmers, workers, and fishermen who decide how to invest the Fair Trade Premium based on their community’s greatest needs: often clean water, education, and healthcare.”
So-called “green” companies enjoy enhanced reputations and receive positive support from customers that often results in increased revenues.